Good News for former handset King Nokia from China

The former handset king which has struggled to remain popular in the last
few years, won an important victory in China this week, striking a subscription deal with China Mobile. It means the country’s No. 1 carrier with 700 million subscribers will start shipping Nokia’s new flagship phone, the Lumia 920T which runs on Windows Phone 8, in December 2012.

This is troubling news for Apple. It has struggled to cut a similar deal with China Mobile, the state-backed carrier that controls around 65% of the country’s wireless market. (The iPhone is instead available through China Unicom and China Telecom. Apple’s iPhone 5 comes out on these carriers next week.)

It could even be one reason why shares of Apple dropped more than 6% last Wednesday, following news of Nokia’s agreement with China Mobile.  Apple derives around 70% of its group profits from the iPhone, so it clearly wants a bigger foothold in what is set to be the world’s fastest growing smartphone market.

Some 29% of global smartphone shipments in the second quarter of 2012 went to China, up from 14% last year. Meanwhile, smartphone shipments to the United States have fallen to 15% from 23%.  China has the highest number of smartphone subscribers by a longshot, at 270 million in the fourth quarter of 2012, and that still only represents about a quarter of all mobile phone subscriptions in the country.

The key issue is money, and the fact that Apple prefers to take larger cuts of subsidy payments from mobile networks, compared to other handset makers. Apple seems to not be making an exception (or at least one big enough) for China Mobile.

China Mobile’s chief executive Li Yue said recently that both companies needed to negotiate details of a possible “benefit sharing model” before his network could make the iPhone available to customers. Read “benefit sharing” as a bigger slice of iPhone profits at Apple’s expense.

Analysts at Deutsche Bank also said earlier this year that after meeting with China Mobile’s management, the “heavy subsidy burden” required by Apple to offer the iPhone on their network had bothered the Chinese government. “The government is not supportive,” they said in their note released in October 2012.

This isn’t to say that Apple is not trying. It’s made sure the iPhone 5 contained a Qualcomm LTW chipset that supports China Mobile’s proprietary 3G network. This network standard, called TD-SCDMA is incompatible with the 3G networks of most other carriers.

But Nokia, a company whose Asha series of feature phones already does well in emerging markets like India, has been negotiating with the Chinese since 1985. And it is also selling another, cheaper Windows smartphone through China Mobile, the Lumia 620, which is priced at $249 without a contract.

Of course, as you would expect in today’s global smartphone war, Nokia’s China Mobile victory is short-term. Both it and Apple face tough competition from local Chinese handset makers, like ZTE, Coolpad and Lenovo, one reason why Apple smartphone market share ranking in China fell to 6th place in the third quarter of 2012, from 4th place in the second quarter, according to market research firm IDC.